Facebook Profit Seen Removing Bar to S&P 500 Membership

Facebook would join Google Inc., EBay Inc. and Yahoo! Inc. in the Internet software and services sub-sector, which makes up about 2.5 percent of the S&P 500, according to data provided by Howard Silverblatt of S&P Dow Jones Indices. Photographer: Daniel Acker/Bloomberg

Nov. 1 (Bloomberg) -- Facebook Inc.’s fourth straight
quarter of positive net income settles one of the final
conditions for the 29th-biggest U.S. stock to join the benchmark
Standard & Poor’s 500 Index 17 months after its trading debut.

The world’s largest social-networking service reported
third-quarter profit of $425 million on Oct. 30 as advertisers
boosted spending on promotions targeting mobile-device users.
Shares in the Menlo Park, California-based company fell after
its May 2012 initial public offering, only climbing back above
the $38 offer price in July this year.

Gaining entry to benchmark gauges provides companies with a
guaranteed shareholder base from funds that follow the indexes.
More than $5.1 trillion tracks the S&P 500, according to the
index provider’s website. With a market value of $122 billion,
Facebook is the largest U.S. company not in the index, Bloomberg
data show. It could be added as early as this month, according
to Stephen Casciano of Credit Suisse Group AG.

“The earnings were definitely the biggest criteria point
holding Facebook back from being a top candidate,” Casciano, a
New York-based portfolio-strategy analyst at Credit Suisse, said
by telephone today. “S&P’s selection process is subjective, so
you can never say with great confidence who will be added to the
index, but since they reported positive earnings, it’s now a
very good candidate.”

S&P doesn’t speculate on changes to the index “as a matter
of firm policy,” Soogyung Cho, a spokeswoman for S&P Dow Jones,
said by e-mail. Genevieve Grdina, a spokeswoman for Facebook,
didn’t immediately respond to an e-mail requesting comment.

Mobile Advertising

Facebook slipped 0.1 percent to $50.19 at 1:10 p.m. in New
York today. The shares surged 89 percent this year through
yesterday, compared with the S&P 500’s 23 percent advance, as
innovations in mobile advertising fueled sales growth.

“Facebook satisfies all the criteria,” Victor Anthony, a
New York-based analyst at Topeka Capital Markets Inc., said by
phone. “It meets market cap, liquidity, it’s domiciled in the
U.S., public float. Now they’ve met financial viability in terms
of GAAP profitability this quarter. The only sticking point is
sector classification.”

Facebook would join Google Inc., EBay Inc. and Yahoo! Inc.
in the Internet software and services sub-sector, which makes up
about 2.5 percent of the S&P 500, according to data provided by
Howard Silverblatt of S&P Dow Jones Indices. While technology
companies already have the largest representation of any sector,
accounting for 17.8 percent of the gauge, that’s not necessarily
a barrier to the addition of another Internet stock, he said.

Emulate Markets

“The intent is to emulate the full markets,” Silverblatt,
a senior index analyst at S&P Dow Jones in New York, said by
phone. “Even though technology has the largest sector
representation, the question is: ‘does it have the largest
sector representation within the U.S. domestic market?’”

Google joined the S&P 500 about 18 months after its August
2004 trading debut. Following that timeline, Facebook could gain
entry in mid-November at the earliest, Casciano said. If it’s
added to the S&P 500, he estimates about 190 million shares of
the company would have to be bought by passive funds that track
the index.

Exchange-traded funds and other products with about $1.6
trillion in assets track the index, according to information
published on the website of S&P Dow Jones, a joint venture of
McGraw-Hill Cos. and CME Group Inc.

“It would increase the demand for the shares,” said
Topeka’s Anthony, who has a buy rating on the shares and a one-year price estimate of $63. “Funds would have to own it, like
those that replicate the index.”

Russell, MSCI

Facebook is already a member of the Russell 1000 Index and
the MSCI World Index. It joined the Nasdaq-100 Index in December
2012 after the exchange operator cut its usual waiting period as
part of negotiations that led to Facebook choosing to list on
the Nasdaq Stock Market rather than the New York Stock Exchange.

Index changes are made “as needed,” S&P says on its
website. In May, Facebook satisfied the requirement of trading
for six to 12 months following an IPO. Other criteria the S&P
committee considers are market value and the percentage of
shares available to the public, known as free float, which must
be at least 50 percent.

Facebook would be the largest company to be added to the
S&P 500 since Warren Buffett’s Berkshire Hathaway Inc. joined in
January 2010, according to Casciano. If included, it would be
the 29th biggest company in the gauge, exceeding the value of
Boeing Co., McDonald’s Corp. and American Express Co., data
compiled by Bloomberg show.

Transocean Ltd. replaced Dell Inc. in the S&P 500 last
month after Chief Executive Officer Michael Dell and Silver Lake
Management LLC purchased the computer maker in a $24.9 billion
leveraged buyout. Luxury-goods company Michael Kors Holdings
Ltd. will succeed NYSE Euronext in the index after
IntercontinentalExchange Inc. completes its acquisition of the
exchange operator, according to S&P.